Pub. 6 2015 Issue 3

www.wvbankers.org 30 West Virginia Banker Traditional Financial Institutions and Community Loan Funds Combining Resources By Jen Giovannitti, Shannon McKay and Sean O’Hara, Federal Reserve Bank of Richmond Introduction to Alternative Lending While traditional financial institutions form the foundation of the West Virginia lending landscape, a complimentary sector composed of nontraditional lenders also provides credit access for borrowers. Al- ternative lending is the industry term used to refer to nontraditional credit sources. Alternative lenders extend credit or may provide loans with a mission-driven pur- pose, but they do not hold deposits. The alternative lending industry includes small-dollar consumer lenders, for-profit commercial microlenders, peer-to-peer lenders, large retailers, and other alter- native commercial lenders. 1 Alternative lenders tend to specialize as credit sources for microloans, which are relatively small dollar loans — for example, $50,000 or less. They distinguish themselves from tra- ditional lenders in several ways, including loan terms, an applicant’s credit assess- ment, and their capital sources. Compared to traditional banking, this lending sector is very small. Yet, with- in this sector, the number of certified Community Development Financial Institutions (CDFIs) is growing. CDFIs are institutional lenders with community development missions that have gained certification from the U.S. Department of the Treasury’s CDFI Fund . There were 958 certified CDFIs as of June 30, 2015. 2 Since its inception in 1994, the CDFI Fund has awarded more than $2.1 billion to CDFIs, allocated $40 billion in New Market Tax Credits, and closed $525 million in guaranteed bonds through the CDFI Bond Guarantee Program. 3 Partnering with Alternative Lenders Traditional financial institutions can find a variety of ways to partner with alternative lenders. These partnerships may allow